From Farm to Firm
Rural-Urban Transition in
Developing Countries
Nora Dudwick, Katy Hull, Roy Katayama, Forhad Shilpi,
and Kenneth Simler
DIRECTIONS IN DEVELOPMENT
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From Farm to Firm

From Farm to Firm
Rural-Urban Transition in
Developing Countries
Nora Dudwick, Katy Hull, Roy Katayama,
Forhad Shilpi, and Kenneth Simler
© 2011 The International Bank for Reconstruction and Development / The World Bank
1818 H Street NW
Washington DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
All rights reserved
1 2 3 4 14 13 12 11
This volume is a product of the staff of the International Bank for Reconstruction and
Development / The World Bank. The findings, interpretations, and conclusions expressed in this
volume do not necessarily reflect the views of the Executive Directors of The World Bank or the
governments they represent.
The World Bank does not guarantee the accuracy of the data included in this work. The bound-
aries, colors, denominations, and other information shown on any map in this work do not imply
any judgment on the part of The World Bank concerning the legal status of any territory or the

Perspectives on Transformation 1
Building on the WDRs: Our Work Program 7
Main Findings 9
References 11
Part I Global, National, and Local Perspectives
on Urbanization and Inclusive Growth:
Examples from Africa 13
Chapter 1 Urbanization: Essential for Development 15
Urbanization and Inequality 17
Why Africa? 18
Organization of Part I 21
Notes 22
References 23
Contents
Chapter 2 Global Level: Recent Patterns and Trends
in Rural and Urban Welfare Inequality 25
Sources of Data 28
Methods 30
Results 32
The Elusive Quest for Patterns 44
Conclusion 47
Notes 48
References 49
Chapter 3 National Level: Three Country-Level Perspectives
on Rural-Urban Transitions 51
Structural and Spatial Transformations in Ghana,
Mozambique, and Uganda 52
Rural and Urban Poverty Trends 57
Sources of Rural-Urban Inequalities 64
Methodology 65

Rural Nonfarm Activities and the Rural-Urban
Transformation 120
Conclusion 121
Notes 122
References 123
Chapter 7 Policies, Institutions, and Initial Conditions 125
Economic Policies 125
Factor Markets: Land and Labor 128
Human Capital Endowments 131
Connective Infrastructures 134
Conclusion 138
Notes 139
References 139
Chapter 8 Land Market Institutions and the Rural-Urban
Transformation 141
Impact of Land Inequality: The Existing Evidence 141
Impact of Land Market Restrictions: The Existing
Evidence 147
Summary of Case Studies and Policy Implications 154
Notes 156
References 156
Chapter 9 Geographical Linkages and the Rural-Urban
Transformation 159
Poverty, Urbanization, and Employment Structure
along the Rural-Urban Continuum 159
Case Study 1: The Rural Employment Pattern and
Urban Linkages 163
Contents vii
Case Study 2: Agglomeration, Spillover, and
Location of Nonfarm Activities 165

1.1 Defining Urban 16
2.1 Are Rural-Urban Welfare Differences Shrinking
or Growing? 27
viii Contents
2.2 Comparing Welfare Differences and Changes 31
4.1 Poverty and Slums 89
4.2 Postindependence Attitudes toward Urban
Development 93
4.3 Corruption in Kampala 97
4.4 Slum Upgrading in Accra 99
4.5 Promoting Agglomeration through Regional
Integration 101
6.1 Economic Density versus Density of the Poor 116
8.1 Inequality and the Evolution of Occupational Structure:
Theoretical Insights 143
8.2 Evidence on the Effects of Land Reforms 149
10.1 The Recent Evidence on Migration: A Selected Review 176
10.2 Migrating to Economic Density in Brazil: Rational
Decisions or Bright Lights? 188
Figures
1 WDR 2008’s Classification of Agriculture-Based,
Transforming, and Urbanized Countries 2
2 Divergence, Then Convergence, in Rural-Urban Gaps 4
1.1 Urbanization and Per Capita GDP across
Countries, 2000 17
1.2 Proportion of Urban Populations Living in Slums
by Region, 2005 20
2.1 Cross-Sectional Data from WDR 2009 on
Urban-Rural Consumption Differences 26
2.2 Rural-Urban Welfare Differences in Initial Survey

Sri Lanka 119
6.4 Contribution of Rural Nonfarm Sectors to Rural
Income and Employment, South Asia 121
7.1 Average Tariff Rate (Unweighted), South Asia 126
7.2 Average Tariff Rate on Agricultural Products,
South Asia 127
7.3 Nominal Rate of Assistance, South Asia 128
7.4 Difficulty of Hiring and Redundancy Costs, South Asia 130
7.5 Access to Health Care Facilities, Sri Lanka 134
7.6 Road Density, South Asia 135
7.7 Travel Times, Nepal 137
7.8 Travel Times, Sri Lanka 138
8.1 Area under Land Development Ordinance (LDO)
Restrictions, Sri Lanka 150
8.2 Agriculture’s Share in Total Employment, Selected
Countries in Asia 151
9.1 Poverty Headcount Ratio: Bangladesh, 2004–05 160
9.2 Poverty Headcount Ratio: Pakistan, 2004–05 160
9.3 Access to Services: Bangladesh, 2000 161
9.4 Access to Services: Pakistan, 2004–05 162
9.5 Percentage of Urban Population in Small, Medium,
and Large Cities, Bangladesh and Pakistan 162
9.6 Shares of Nonfarm Employment and Enterprises
by Area: Bangladesh, 2006 166
xContents
9.7 Annual Percentage Growth in Nonfarm Employment
and Enterprises: Bangladesh, 2000–06 167
10.1 Out-migration of Workers by District: Nepal, 2001 179
10.2 In-migration of Workers: Nepal, 2001 180
10.3 Migrants and Nonmigrants by Age Category, Nepal 180

7.1 Selected Human Development Indicators, South Asia 132
7.2 Access to Education and Health Care Facilities in
Rural Areas: Nepal, 2003 133
Contents xi
7.3 Selected Infrastructure Indicators, South Asia 136
8.1 Employment Choice of Individuals, Pakistan: Marginal
Effects from Multinomial Logit Regressions 145
8.2 Real Wages, Pakistan: Individual-Level Instrumental
Variable Regressions, Labor Force Survey, 2005–06 147
8.3 Sectoral Employment Shares in Sri Lanka, 2002 152
8.4 Effects of the Land Development Ordinance (LDO)
on Employment Choice, Sri Lanka 152
8.5 Market Access, Land Tenure Arrangement, and
Income, Sri Lanka 153
9.1 Urban Access, Cash Crop Potential, and Nonfarm
Employment in Bangladesh: Multinomial Logit Results 164
9.2 Agglomeration Economies and Start-up Firms’ Location,
Bangladesh 168
9.3 Spillover and Start-up Firms’ Location, Bangladesh 169
9.4 Productivity and Spatial Externality in Bangladesh:
Regression Results from Non-Metro Investment Climate
Survey Sample 170
10.1 Ethnic Profile of Migrants and Nonmigrants
(Adult Males), Nepal 182
10.2 Comparing Actual Destination and Alternative
Destinations of Migrants, Nepal 183
10.3 Consumption and Choice of Migration Destination:
Male Migrants, Nepal 185
A.1 Countries and Surveys Used for Consumption and
Poverty Analysis 202

models set out in WDR 2009. Relying on development professionals from
various Bank departments—those with experience in geography and
Foreword
urban and rural development policy, along with experts in poverty and
inequality analysis and policy—these studies tested analytical methodolo-
gies adapted to relatively data-poor economies, as well as those that could
benefit from more sophisticated data foundations. The studies benefited
from the guidance and advice of a group of experienced economists and
policy experts both within and outside the Bank. Possibly more important
from the viewpoint of their contribution to development policy, these
studies focus attention and resources on the links between geography and
poverty in the world’s poorest regions—Sub-Saharan Africa and South
Asia—adding new value to the knowledge base created by WDR 2009.
We are pleased to present this collection to the economists, social sci-
entists, and policy makers concerned with issues of geography and devel-
opment in poor countries, and we hope it will continue to spark useful
and evidence-based debates aimed at reshaping economic geography.
Jaime Saavedra Marisela Montoliu
Acting Director Adviser and Former Head
Poverty Reduction and Equity Spatial and Local Development
Poverty Reduction and Economic Sustainable Development
Management Network Network
The World Bank The World Bank
xiv Foreword
xv
The World Bank work program on rural-urban transformation, co-sponsored
by the Poverty Reduction and Economic Management (PREM) Network
and Sustainable Development (SD) Network vice presidencies, spanned
two years, from mid-2008 to mid-2010, and benefited from the contribu-
tions of development analysts and practitioners from the World Bank and

Finally, the authors would like to acknowledge the organizational and
logistical support provided by Alexander Arenas, Ramu Bishwakarma,
Lanto Ramanankasina, and Grace Sorensen.
xvi Acknowledgments
1
The transition from predominantly rural to increasingly urban economies
is one of the greatest development challenges of these times. Urbanization
spurs growth and reduces poverty, but also can engender inequalities.
Managing the rural-to-urban transition in a way that ensures shared growth
is therefore a major concern of developing country policy makers and the
development community.
Rural-urban transformations have been the focus of two consecutive
World Development Reports (WDRs): WDR 2008, Agriculture for
Development and WDR 2009, Reshaping Economic Geography (World Bank
2007, 2008). Our research agenda picks up where the WDRs left off by
providing more finely tuned insights into the transformation process across
rural and urban spaces. This overview distills some of the principal messages
of the WDRs. It then outlines the main objectives of our work program
before summarizing our key findings and their policy implications.
WDR 2008 and WDR 2009: Rural and Urban Perspectives
on Transformation
The two most recent WDRs provided a starting point for our comple-
mentary studies of the rural-urban transformation. WDR 2008,
Overview
Agriculture for Development, studies the structural transformation of the
economy from a rural development perspective. WDR 2009, Reshaping
Economic Geography, addresses the spatial transformations that accom-
pany those structural changes—but it does so primarily from an urbaniza-
tion perspective.
WDR 2008 notes that developing countries are at very different stages

AZE
UKR
RUS
BLR
urbanized countries
transforming countries
COL
SLV
SVK
DOM
PHL
BOL
PER
TUR
MAR
SEN
AGO
DZA
GIN
TCD
SYR
TGO
CMR
CMR
SDN
BDI
INDIA
(1965–94)
CHINA
(1981–2001)

VNM
BGD
ZAR
TJK
TUN
IDN
EGY
GTM
IRN
YEM
KHM
LKA
ROM
THA
IND
ARG
agriculture-based
countries
BRAZIL
(1970–96)
actual poverty data predicted poverty data
poverty data over time
Figure 1 WDR 2008’s Classification of Agriculture-Based, Transforming, and
Urbanized Countries
Source: World Bank 2007, fig. 1.3.
agriculture.” Thus India, a “transforming” country, has agriculture-based
states such as Uttar Pradesh and Bihar and urbanized states such as Goa.
WDR 2009 further explores geographically uneven development,
whether it is local, national, or international. It classifies areas according
to whether their principal challenges are related to “density,” “distance,” or

in agriculture-based economies policies should focus on boosting produc-
tivity in smallholder farming. In transforming economies, policies should
also promote growth of the rural nonfarm sector. And in urbanized
economies, policies should help to link farmers to modern food markets,
agroindustry, and environmental services. WDR 2009 asserts that in 1-D
Overview 3
4 From Farm to Firm
02468
ratio of urban to rural per capita
consumption
1
2
3
GDP per capita (2000 US$, thousands)
a. Locally, first divergence, then convergence, in rural-urban gaps
1950 1960 1970 1980 1990 2000 2010
coefficient of variation of
GDP per capita
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2.0
year
024 1210861416
coefficient of variation of regional

rural. In “urbanized” economies, agriculture contributes even less to overall
growth, and poverty is mostly urban.
WDR 2009 classifies countries according to the relative importance of
“density,” “distance,” and “division.” Density refers to the economic output per unit
of land area and is the principal challenge in “1-D” countries. Distance is mani-
fested in densely populated lagging regions in “2-D” countries. Divisions—for
example, between ethnic groups—are an additional obstacle in “3-D” countries.
The seven countries in Sub-Saharan Africa and South Asia featured in our study
would fit into the categories shown in the table.
Based on these classifications, the WDRs might suggest the following policy
responses. For Ghana, an agriculture-based economy, WDR 2008 might recom-
mend public investments to promote agricultural growth and food security. And
because the principal challenge on a national level is one of insufficient density,
WDR 2009 might recommend instigating spatially neutral institutions such as
improved land policies or country-wide education and health initiatives.
WDR 2009
1-D countries 2-D countries 3-D countries
WDR 2008
Agriculture-
based
economies Ghana
Nepal
Mozambique Uganda
Transforming
economies
Bangladesh
Sri Lanka Pakistan
Urbanized
economies
(continued next page)

density, agriculture-based economies WDR 2008 might recommend targeted
investments in rural areas, whereas WDR 2009 might suggest that spatially neutral
investments be the main priority. But both WDRs would concur that a detailed
country-level analysis should guide the specifics of policy design and that a nar-
rower lens—for example, a focus on a particular region or city within each
country—could unearth more complex challenges.
Box 1 (continued)
Building on the WDRs: Our Work Program
Our work program builds on the findings of the WDRs on the rural-
urban transformation, focusing specifically on Sub-Saharan Africa and
South Asia—two regions that pose particularly urgent issues for policy
makers. Although each region is still largely agricultural, each is under-
going rapid rates of urbanization. In fact, cities within the two regions
have the highest prevalence of slums in the world: UN-HABITAT
(2008) estimates that more than 6 out of 10 city dwellers in Sub-
Saharan Africa and 4 out of 10 in South Asia live in slums. These slums
are a powerful reminder that even though the rural-urban transforma-
tion may be good for national development, it can incur inequitable out-
comes for households.
Our country-level focus helps to add nuance to the broad typologies
provided in each WDR. For example, with agriculture contributing
35 percent to its gross domestic product (GDP), Nepal is classified
squarely as an agriculture-based country. But a narrower lens indicates
that the country is in fact a patchwork of largely urbanized areas, such as
the Kathmandu Valley, and almost entirely rural areas, such as the eastern
hills region. Similarly, although Mozambique as a whole is making the
transition from an agricultural to an urban economy, the pace of change
is by no means even. Its capital, Maputo, in the south, is growing at a very
fast pace, but a significant share of the poor population remains in the
rural northern regions.